The Bank of Israel's urgent treatment for the coronavirus crisis is to make it easier for people and companies that have been financially harmed by the crisis to obtain credit. To that end, the central bank is continuing to relax the regulatory requirements designed to ensure the stability of the banks and credit card companies, in order that they should expand the supply of credit to the public.
In that framework, the Bank of Israel Banking Supervision Department, headed by Supervisor of Banks Yair Avidan, has published a temporary order reducing the leverage ratio required of the banks. Under the order, the minimum leverage ratio will be 4.5%, while for the two largest banks, Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI), it will be 5.5%. This compares with existing ratios of 5% and 6%. The banks will have two years in which to revert to the original ratios after the temporary order is cancelled.
The leverage ratio is the ratio between a bank's tier-1 capital and its exposure. Exposure is defined in the document "Basel III leverage ratio framework and disclosure requirements" as the sum of: (a) on-balance sheet exposures; (b) derivative exposures; (c) securities financing transaction (SFT) exposures; and (d) off-balance sheet (OBS) items. The document was published by The Basel Committee on Baking Supervision in 2014 in the wake of the financial crisis of 2008. It states in its introduction, "An underlying cause of the global financial crisis was the build-up of excessive on- and off-balance sheet leverage in the banking system. In many cases, banks built up excessive leverage while apparently maintaining strong risk-based capital ratios. At the height of the crisis, financial markets forced the banking sector to reduce its leverage in a manner that amplified downward pressures on asset prices. This deleveraging process exacerbated the feedback loop between losses, falling bank capital and shrinking credit availability."
As far as the Bank of Israel is concerned, there is no shortage of credit in the Israeli economy, but it is nevertheless necessary to extend the limits in order to prevent a situation in which a regulatory trigger impedes the availability of credit. "The adjustments in this order are intended to allow banking corporations the business flexibility required at this time. Nevertheless, we would stress that it is most important that decisions on granting credit and assistance to businesses and households should be in accordance with the risk assessment and the appetite for risk of the banking corporation," the Bank of Israel states in its new guideline.
In the first half of this year, the banks' credit loss expenses grew sharply, mainly as a result of measures anticipating credit losses in the coming quarters because of the worsening in the economic situation.
Earlier this year, the Bank of Israel took action to make the banks' capital requirements easier, particularly those based on risk. Thus six months ago the Bank of Israel decided that the minimum capital adequacy ratios that the banks are required to present would be reduced by 1% (at the same time as stopping dividend distributions and share buybacks).
Published by Globes, Israel business news - en.globes.co.il - on October 14, 2020
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